The Wider the Base …

The Wider the Base …

June 6, 2017 Off By Chuck

The Dow Jones Transportation index apparently was not invited to the all-time high stock party and as has been both lagging and dragging on the overall market. Stock market bulls would like to see some of the lagging sectors begin to participate and catch up to technology which has been doing most of the heavy lifting pushing the market higher. A good place to start would be the transports and it looks as if the airline stocks may be setting up to cooperate and pull the transports higher.

As you can see in the chart below, the airline index, $XAL, rallied strongly, peaked last December and has been in a tight consolidation for the last six months, forming a bullish cup and handle continuation pattern. This consolidation has allowed the December overbought high to unwind. Notice also how far price got extended beyond the red 200 day moving average in December, another indication it needed a breather.

While the pattern’s upside, if played out, points to a 10-12% gain which isn’t bad, what has me more interested is the width of the consolidation base. The old saying the wider the base, the higher in space indicates the potential for a much bigger run, should the market have more gas left in the tank and the transports play catch-up.